Eric Posner, "How to Make Poison Pills Palatable"

Last month, Rupert Murdoch’s News Corporation divided into two entities and inserted shareholder rights plans, or “poison pills,” in their charters to shield them from hostile takeovers.

Shareholder activists are up in arms. The poison pill “is one more tool to entrench management,” one activist told The Financial Times when News Corp. first announced its plan. The problem, however, is not the existence of poison pills but their design: a more carefully designed poison pill would address activists’ concerns while preventing abusive takeovers.

A poison pill deters takeovers typically by giving existing shareholders (including management) the right to buy and vote additional shares at reduced price when a takeover is initiated. It was invented in the 1980s in reaction to a wave of corporate takeovers. Managers disliked takeovers because they frequently lost their jobs in the resulting reorganization, and argued that takeovers disrupted a firm’s operations, caused layoffs, and destroyed shareholder value. Shareholder activists replied that managers used poison pills to entrench their positions at shareholders’ expense.